Joint Committee suggests more detailed scoping of the CRA’s COVID-19 relieving positions on international transactions

The Joint Committee has suggested that CRA’s Guidance on international income tax issues raised by the COVID-19 crisis, which provided relief from the crossing of status or characterization thresholds due to COVID Travel Restrictions, should be expanded:

  • Although the Guidance focused on whether a foreign corporation will be resident in Canada due to participation in board meetings from Canada, similar relief could be applied elsewhere, e.g., regarding whether a foreign affiliate (FA) qualifies as resident in a “designated treaty country” (“DTC”) - so that, for example, where directors cannot attend a board meeting in person solely because of Travel Restrictions, this will not negatively impact the treatment of active income earned by FA as exempt surplus.
  • Although the Guidance addresses having a Canadian permanent establishment as a result of the Travel Restrictions, it does not address the related inadvertent PE issue of income from an active business being deemed to be foreign accrual property income where it is carried on through a PE in a “non-qualifying country.”
  • Furthermore, whether income from an active business carried on by an FA resident in a DTC will be included in its exempt earnings will often depend on whether that income is attributable to business activities carried on in a DTC, which could be affected by the stranding of employees in a non-DTC.
  • Another FAPI issue: one of the exceptions to the “investment business” definition looks to whether the activities of the foreign affiliate are regulated under the laws of “each country in which the business is carried on through a permanent establishment in that country”.
  • The Guidance, which speaks to relief for the impact of Travel Restrictions regarding whether a non-resident will have a PE under the 183-day test in the services PE provision, could also provide relief under the 12-month period referenced in the building site and installation or drilling rig provisions.
  • The Guidance provided administrative relief for employees who exceeded the 183-day threshold in the Canada-U.S. Treaty, but should also address the 45-day and 90-day periods applicable in determining whether an individual resident in a treaty country is a "qualifying non-resident employee" under s. 153(6).

Neal Armstrong. Summaries of Joint Committee, “Guidance on International Income Tax Issues raised by the COVID-19,” 11 June 2020 Joint Committee Submission under Reg. 5907(1) – exempt earnings – (d). s. 95(1) – FAPI, Treaties – Income Tax Conventions – Art. 5, s. 153(6).